Fact-checking AOL's spurious story about retirement plans and sick babies

This week, AOL CEO Tim Armstrong told employees that they would have less retirement money because two of their colleagues had sick babies.

The statement created the kind of outrage you would expect, and Armstrong was forced by public pressure and mockery to give up his plan last night. But without the offensive reference to dead babies, Armstrong might well have pulled it off.

So we wondered: is it even true? Are companies being financially punished by their largesse to employee benefits like healthcare and especially, to 401(k) plans?

Not exactly, as it turns out. And yet a lot of companies are cutting back on retirement benefits. If Armstrong has backed away, it’s only a battle, not the war, against retirement plans. Other employers are intent on containing costs and companies like IBM remain as an example of that option.

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First, let’s revisit Armstrong’s case. When commenting on AOL’s initial decision to cut back its retirement benefit plan, Armstrong first blamed the cost of Obamacare. “Do we pass the $7.1m of Obamacare cost to our employees?” Armstrong said on CNBC on Thursday, by way of explanation. “Or do we try to eat as much of that as possible and cut benefits?”

Clearly, Armstrong’s question was even more than rhetorical. He went on to rationalize the decision by pointing to the high cost ($2m, in his estimate) of covering the pregnancies and births of two “distressed babies” to AOL employees.

Clearly, those figures loom as high as Mount Everest for the company that just reported a 13% increase in revenue and a 5% increase in operating income, with profits of $36m. That’s after taking into account the high costs of those “distressed babies,” by the way.

The numbers tower so high, in fact, that the company believed that all of its 5,000-plus employees should share the pain.

Here’s how AOL planned to address the higher costs of employee healthcare: it would have taken it out of matching contributions to 401k benefits. The policy change would have been be the tackiest example yet of employers trying to rein in the cost of providing employee benefits – despite the fact that Americans’ wages have remained stagnant while corporate profits have grown.

But on to the numbers. Is Armstrong right to complain? It turns out, probably not.

Here’s how it worked before at AOL – and how it will remain, now that Armstrong has changed his mind: AOL matched 50 cents of every dollar that an employee puts into his retirement fund – up to 6% of the employee’s salary. That’s a nice chunk of change. Let’s say you earn $120,000 a year and put 10%, or $12,000, in your 401k plan. That means AOL will chip in $3,600 to your retirement.

Here’s how it would have worked if Armstrong had his way: AOL would have made contributions to its employees’ 401k plans only until after the end of the calendar year – and only if the employee still worked for them or retired. So if you quit AOL or were laid off in, say, October, you forfeited any employer match.

Had you been one of the employees that AOL laid off last year, like the creative director of its Patch local news initiative, who was fired in a meeting in front of scores of colleagues, or had you chosen to move on to greener pastures, you’d have lost that $3,600 altogether. Better yet (for AOL), your employer would have captured any rise in the value of your 401k investments in 2013 from that “match” money that otherwise would have benefitted you.

AOL didn’t respond to a request for comment on their policy change.

The trend of shaving retirement benefits

Happily for most employees, this kind of cheapskate behavior – trimming matching contributions – isn’t the norm. Only one other major company, IBM, has announced plans for a similar shift. (That news broke just over a year ago; IBM, by the way, didn’t blame Obamacare or “distressed babies”.)

If it does catch on, we’ll need to worry.

A recent survey by the Bureau of Labor Statistics showed that younger baby boomers held an average of 11 jobs between the ages of 18 and 46. If employers adopted this approach, boomers could have forfeited as much as four or five years’ worth of employer 401k matches, as well as investment gains on those contributions. It’s not the only one.

For many companies, 401k plans have been an unexpectedly large cost. There has been a big push in favor of “auto enrollment” in 401k plans, requiring employees to be enrolled in plans by default. Sure enough, the results seem to suggest that more are opting to participate.

That’s great, except for companies trying to contain compensation costs. The more employees jump aboard the 401k bandwagon, the greater the demand for companies to match what their employees contribute.

And if you think that companies are oblivious to that fact, think again. As auto-enrollment has become more popular, companies have become chintzier about how much they pitch in.

Two researchers tried to understand why companies weren’t griping about the costs of matching everyone’s retirement savings when they switched to auto-enrollment 401k plans. Nadia Karmcheva, a research associate at the Urban Institute in Washington, along with senior research associate Barbara Butrica, worked on the question.

Their study showed why that was. “Employers with auto-enrollment plans have match rates that are low enough, or a default contribution rate that is low enough, that overall plan costs aren’t significantly different” from companies that aren’t automatically signing up employees for 401k plans, says Karamcheva.

It’s not possible to tell whether companies are actually cutting back the rate at which they match employee 401k contributions, says Karamcheva: that would require access to private data. But clearly, auto-enrollment plans aren’t automatically more generous.

The AOL kerfuffle is another reminder that in spite of the move from pensions to 401k plans – shifting responsibility for retirement from the employer to the employee – companies are still intent on paring their own costs to the bone.

The Bureau of Labor Statistics shows that retirement savings plans cost employees only 3.7% of total compensation by late 2013, which amounts to a tiny, almost imperceptible increase from 3.3% in early 2004.

Healthcare costs for company employees are rising and they are far bigger than retirement costs; they make up 7.7% of total compensation, up from 6% in the same time period. That was true well before Obamacare.